Central banks corral trading herd

The most valuable commodity when trading is information. And preferably information that no one else has. There must be plenty of fund managers out there who, from time to time, tell their broker to stop sending them information and, instead, ask them to go out there and get it.

As Gordon Gekko would say: “I wanna be surprised. Astonish me pal. Tell me something I don’t know. New information – I don’t care where, or how you get it – just get it.’’

Armed with that precious piece of information, traders and managers can be ahead of the game and so beat the market.

But it’s getting tougher to do so.

Information is much more readily available. Twenty years ago, some bond desks would send a junior economist to the Sydney office of the Australian Bureau of Statistics so when the latest current-account numbers were placed on the desk at 11.30am they could phone the relevant numbers through immediately.

It was a challenge to grab one of the reports first to get the numbers first.

Now they get released on a screen at the same time for everybody to see.

Go to a Bloomberg terminal and a raft of financial statements for a range of companies can be downloaded in a flash.

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Head to other screens and charts, data, earnings expectations, predictions, shareholdings, special trades,volumes, and price history can all be downloaded instantly.

Hedge funds were once known for making money in all sorts of markets because they had the ability to short, or sell stocks and bonds they didn’t own, when many traditional fund managers were simply long only funds.

But the massive growth in derivatives and changes to mandates means shorting is nowhere near the exotic instrument it used to be.

Those extra returns over and above what hedge funds delivered was referred to as alpha and related directly to the skill of the manager in adding extra returns.

In contrast, the basic return of the underlying market is known as beta.

The accompanying graph shows the performance of the average active large-cap Australian share fund relative to the S&P/ASX200 Accumulation Index over the past 10 years. If $10,000 was invested in 2002 with active managers, it would be worth about $20,000, below what the market or beta return was.

For the active fund managers, the return is net of fees, which is why on average, so many of them do not outperform the benchmark.

Not that long ago, beta grazers and alpha hunters were the new catch phrases, dominating the debate in the investment management industry between passive, or index, managers and active equity and hedge fund managers.

There was even talk of “supernovas of alpha" (added value above market benchmarks) to be found in some markets, contrary to efficient market theories or even zero-sum-game fears.

But there are signs emerging that “old alpha" sources or returns are deteriorating compared with 10 years ago in Australian shares and bonds and in global shares.

Put simply, it’s just getting harder to make money.

For example, the lack of mergers or acquisitions means there’s no buying of shares in the company being acquired and selling shares of the company behind the takeover to try and make money.

Furthermore, some trades have become very crowded, making it hard to trade in and out of.

Volumes are very low on many markets and moving positions around is not as easy as it used to be.

When liquidity dries up, it makes life tough for everybody. It can force investors to take longer term positions which can lead to larger losses.

The role of central banks in today’s markets is also making life tough for traders and hedge funds, some arguing it’s not a true market.

Sitting there waiting for a Bernanke or a Draghi to say or do something makes it tough as traders never know whether they are jaw- boning or action is just around the corner.